The recent sell-off in markets might have provided a good opportunity for investors to snap up bargains in the fast-growing technology sector, according to GAM Investments’ Mark Hawtin.
October saw markets sell-off prompted by more hawkish comments from Federal Reserve chair Jerome Powell.
However, there was an even sharper correction among some of the better-known technology stocks – which have been leading the strong market surge in recent years.
Indeed, while the S&P 500 fell by 6.94 per cent – in US dollar terms – during October, the more technology-focused Nasdaq Composite index shed 9.2 per cent.
Performance of indices in October
Source: FE Analytics
Yet, Hawtin – manager of the $280.1m GAM Star Technology fund – said that investors should take heart from how technology stocks have fared following previous downturns.
He explained: “As has been the case so often in the past, technology shares – with their higher than average beta – are hit hard when markets get nervous and fall sharply.”
With a much sharper correction than in previous years, some investors have sold out of technology stocks for a range of reasons, said the manager.
Indeed, Hawtin said investors have sold out of Chinese internet stocks because of the potential impact of an escalating trade war with the US, storage and memory companies over fears of an economic slowdown, and large-cap tech names because they are over-owned.
“From a fundamental point of view, this stance could not be more wrong,” said the GAM manager. “We believe the evolution of disruptive technology has never been as strong or growing as fast as it is today.”
Instead, Hawtin said investors should look to the last major market correction – the global financial crisis – to see how tech stocks could react this time.
In the two years from the widely-held start of the financial crisis on 7 August 2007, the Nasdaq Composite index fell by 21.76 per cent compared with a fall of 30.46 per cent for the S&P 500.
In the 10 years following the start of the financial crisis, however, the Nasdaq Composite significantly outperformed the S&P 500 more than doubling the blue-chip index’s gain of 70.26 per cent having risen by 148.48 per cent.
Performance of indices over period
Source: FE Analytics
Looking back to the crisis period, Hawtin highlighted two of the leading tech names at the time: software as a service provider Salesforce and online retailer Amazon.com.
As Salesforce saw some degradation in sales during the global financial crisis shares fell sharply, down 60 per cent, but had risen off lows by 24x to end-October 2018.
“The market had mistakenly assumed the economic downturn affected all companies equally and therefore punished a company that ultimately emerged relatively unscathed from it,” he said.
Similarly, Amazon also fell by 60 per cent during the crisis and rallied from lows in late 2008 by 34x to the end of October.
Hawtin said it was worth noting that as long as huge disruption in technology continues there will be strong companies able to carve out substantial markets for themselves.
“Therefore, we believe sell-offs in broader markets, which lead technology shares sharply lower, should be viewed as attractive opportunities to have another bite at the apple,” he said.
However, the manager said some investors may choose to stick by value names in the sector snubbing growth names as the end of the cycle approaches.
This, Hawtin said, could lead to some investors now backing the wrong companies.
The GAM manager explained: “Focusing on pure technology it has been worthwhile to back high-yielding, cash generative companies – like Apple – and semi-conductor stocks.
“Yet, when markets go through a full cycle, these – more cyclical – companies are unlikely to recover as fast as their growth counterparts because in many cases we would expect them to suffer a significant degradation in growth together with the margin and multiple contraction that goes with that.”
Indeed, the GAM Star Technology manager said that it was sticking by its central thesis that “whatever the impending downturn ultimately looks like” growth prospects for leading tech names will not be significantly affected.
“Unlike the sell-off in early 2018, this recent downturn has been far broader and therefore now offers a chance to extend positions in many more names at attractive prices, in our view,” he said.
“Within our list of targets we have seen stocks decline as much as 61 per cent and are starting to invest back into these names.”
He concluded: “In our view, investors should do the same. It will never be easy to precisely time the bottom, but we believe markets are already a long way down and so risk/reward is more favourable.
“Rather than trying to decide if this is the end for technology or if this is the bottom, we choose to look at the evidence of 2007-09 and feel this must be viewed as a buying opportunity.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Hawtin, has been with GAM Star Technology fund since launch in February 2011. Over the past three years, the fund has delivered a total return of 77.37 per cent, compared with an 88.09 per cent gain for the MSCI World/Information Technology benchmark index and a 67.21 per cent total return for the average IA Technology & Telecommunications peer.
The fund has a clean ongoing charges figure (OCF) of 1.27 per cent.